Bank of Ireland trying to leave Guarantee

Sand · 09-09-2010 10:01PM #1

This slipped past me first time around, but back last month, Bank of Ireland announced their intentions to buy back Lennihan's preference shares so they could resume paying dividends to their shareholders. This is typical of the moral hazard induced by the bank rescue plan. If the banks had to manage their own balance sheets and allow for bad debts, theyd be slow to bleed out profits in dividends, just as they are slow to lend.

Seeing as the taxpayer is on the hook, they dont need to worry about silly little things like risk or losses. Losses are for little people. Even if their balance sheet takes a hammering on residential mortgage defaults, itll be the taxpayer who covers the losses. So they can afford to suck capital out of the bank and give it to their shareholders, effectively a state subsidy.

The second thing that attracted my attention was their plan to leave the guarantee scheme, by trying to raise debt outside the guarantee terms. The attraction to the banks of doing this is that they dont have to pay the fees the government charges them for the guarantee.

My question is even if they could, should they be allowed to leave the guarantee? Its very, very clear that the government will throw the taxpayer under the bus to save the banks creditors. No party has taken the line that the creditors should take the losses long before the taxpayer ought to.

Implicitly, or explicitly, government policy is that there is a guarantee. Allowing the banks to leave the guarantee only means that they dont pay the taxpayer a premium for the insurance they have. My view is if I am on the hook for the losses of bank shareholders and creditors, then I want my money. As such, any bank that is large enough or connected enough to be considered "systematic" should be not given the option of the guarantee, but actually forced to comply with it to operate in Ireland to properly compensate the taxpayer.

This tax should be raised on leverage ( particularly short term debt, and secured debt which raises the greatest threat to the taxpayers interests) and should be significant enough to seriously discourage the practise of borrowing short and lending long. It should also be raised on short term deposits which are most at risk of a bank run, again, another threat to the taxpayer. Actually, perhaps a little more usefully the tax ought to be on the magnitude of long term lending carried out on the back of that short term deposit base.

View · 09-09-2010 10:54PM

Sand wrote: »

My question is even if they could, should they be allowed to leave the guarantee?

Of course, they should. There's profits and bonuses to be made for share-holders and staff.

Loses are, after all, only for losers NAMA.

johnnyskeleton · 09-09-2010 10:58PM

Interesting.

If they:
1) paid back all recap money in full with whatever interest and fees are due;
2) paid for their guarantee to date, perhaps including a small exit fee;
3) take back all the NAMA loans at the price paid plus fees incurred in administration of NAMA and interest paid by government for NAMA to date on them;
4) provide a clean audited balance sheet that shows that they are not insolvent (based on real valuations and including the de-NAMAified loans;
5) accept that they are no longer guaranteed by the State and if there is a run on them then they will not be bailed out twice;

then I'd have no problem with them leaving the guarantee. This would mean that all cost to the taxpayer has been recouped in full, an additional premium is paid to the taxpayer for helping them avoid insolvency over the last two years and if they are solvent again it is great news (if they are not then they will be wound up and sold off).

I don't know why you think that they would be allowed to repay the recap money and exit the guarantee with an agreement that they would be bailed out again if they get back into trouble. That's just too audacious, even given the government we have.

Dirk Gently · 09-09-2010 11:12PM

I agree with you that the tax payer should benefit and no bank which was guaranteed should be allowed to cut and run when the time suits them to do so. It's not that straight forward though. The longer our banks are seen to need a guarantee the less confidence there is in them and the more it costs us all. Realistically I don't think the time to release the banks is upon us or anywhere close tbh but we will have no choice but to do it anyway. I'd don't see BOI or AIB as being prepared to compete without the safety net. Not unless we bluff our way out of it.

It's much more likely to be bluff and posturing to give the impression that they've turned the corner. I think they are sounding out the market and testing the waters. Eventually a decision is going to have to be made on the guarantee, and the government can't keep postponing it every few months. Borrowing is unsustainable, eventually, guarantee or no guarantee there will be a run on the banks as people realise that the state can't borrow enough to cover it. It's all very chicken and egg but the state needs the burden of guarantee gone and the only way to do that is to fool the world into believing the banks can stand alone. Like you say, it's subtle, but here you have a bank looking like it wants to resume business as normal. That's the image the Gov desperately needs to sell to the world.

The timing of ending the guarantee will make or break this country. The banks have to look safe before they're cut loose. What we could be seeing with BOI is the beginnings of the great bluff. Ideally we want a situation where we don't have a guarantee and the banks can survive. No reason we can't still tax them instead of charging for the guarantee but when they think the timing is right, more than likely yes, we the tax payer will have lost and the banks will more than likely get away without repaying the tax payer anywhere close to what was put in.

Despite all my speculation about a bluff, I think its inevitable that our banks will collapse as the state can't borrow enough and our sovereign debt is exposed as a red herring, nullifying the guarantee. The interesting thing will be what happens then regards the EU and the euro. Countries can't keep getting bailed out one at a time.

ei.sdraob · 10-09-2010 09:30AM

Are they doing this to trying make themselves look "good"?

sort of like saying "we dont need the guarantee because we are so solid" :rolleyes:

does anyone believe them? the confidence in Irish banks must be at all time low by this stage

liammur · 10-09-2010 10:02AM

View wrote: »

Of course, they should. There's profits and bonuses to be made for share-holders and staff.

Loses are, after all, only for losers NAMA.

They are not making profits, and won't for many along day.

Dirk Gently · 10-09-2010 03:38PM

ei.sdraob wrote: »

Are they doing this to trying make themselves look "good"?

sort of like saying "we dont need the guarantee because we are so solid" :rolleyes:

does anyone believe them? the confidence in Irish banks must be at all time low by this stage

I only commented on the reality of what's happening right now, not could have / should have / would have scenarios. No one has confidence in our banks, but that doesn't take away from the fact that everyone must have confidence in them by the time they come off the guarantee. If not, there'll be a run on them all within a matter of days. The money isnt there to do it right, that's why I think the only option they have is bluff and hope there's no run on them. This brings us back to the OP and my take on what BOI are up to, i.e. confidence building. They're running out of road fast on the sovereign debt bluff so it has to come to a head soon. Popcorn at the ready for the end of December.

Sand · 10-09-2010 06:10PM

@Johnny Skeleton

5) accept that they are no longer guaranteed by the State and if there is a run on them then they will not be bailed out twice;

But lets face it - the policy is that regardless of protests to the contrary the state will without hesitation throw taxpayers under the bus to save the management and stakeholders of AIB, BoI, Anglo Irish and any other "Irish" bank. Theyve done it time and again.

I seriously disagree with that policy. I wouldnt bail them out. I have always viewed the Irish banks as being too big for the Irish state to save. But the decision makers will always fold like cheap deckchairs - theyll be bullied and intimidated by the bankers, warned that the sun will fall from the sky if AIB or BoI has to face up to its own losses.

Hence, lets not kid ourselves that there is no guarantee. There is a guarantee. The fiction that there isnt one only suits the banks because they dont have to pay for it. If we accept our political leadership is too weak to ever tell the banks to sort out their own mess, then we as taxpayers need to ensure we are getting our due for the guarantee that we are on the hook for, like it or not.

I don't know why you think that they would be allowed to repay the recap money and exit the guarantee with an agreement that they would be bailed out again if they get back into trouble.

I amnt referring to an explicit agreement of a guarantee. They are operating under the assumption that they will always be bailed out, regardless of protests or claims otherwise. Thats proven to be an accurate assumption so far.

@clown bag

The longer our banks are seen to need a guarantee the less confidence there is in them and the more it costs us all.

Again, the fiction that there isnt a guarantee only suits the banks - there is a guarantee, but if they pretend there isnt then they dont have to pay for it.

I dont want to guarantee the banks, but if Im am forced to by the feckless cowards we call our political leadership, then I want to get paid up front for the guarantee Im am on the hook for.

@liammur

They are not making profits, and won't for many along day.

Depends on how good the accountants are. They will definitly try to pay dividends as soon as they can.

Regardless of making the guarantee explicit and charging up front for it, I definitly believe that leverage in Irish banking ought to be heavily discouraged through taxation, especially money borrowed short by the banks, and lent out long. That would have serious implications for the property market, but I dont think they would be negative ones overall. Irish banks have proven themselves far too stupid and incompetent to be trusted with running anything complicated.

liammur · 10-09-2010 09:17PM

Sand wrote: »

Depends on how good the accountants are. They will definitly try to pay dividends as soon as they can.

I wouldn't recommend buying BOI shares if it's dividends you're looking for.

johnnyskeleton · 11-09-2010 02:46PM

Sand wrote: »

@Johnny Skeleton

But lets face it - the policy is that regardless of protests to the contrary the state will without hesitation throw taxpayers under the bus to save the management and stakeholders of AIB, BoI, Anglo Irish and any other "Irish" bank. Theyve done it time and again.

I seriously disagree with that policy. I wouldnt bail them out. I have always viewed the Irish banks as being too big for the Irish state to save. But the decision makers will always fold like cheap deckchairs - theyll be bullied and intimidated by the bankers, warned that the sun will fall from the sky if AIB or BoI has to face up to its own losses.

Hence, lets not kid ourselves that there is no guarantee. There is a guarantee. The fiction that there isnt one only suits the banks because they dont have to pay for it. If we accept our political leadership is too weak to ever tell the banks to sort out their own mess, then we as taxpayers need to ensure we are getting our due for the guarantee that we are on the hook for, like it or not.

I amnt referring to an explicit agreement of a guarantee. They are operating under the assumption that they will always be bailed out, regardless of protests or claims otherwise. Thats proven to be an accurate assumption so far.

As I said, if it was a condition precedent to their leaving the guarantee that they would sink or swim on their own then there would be no problem and the State would not be obliged to bail them out a second time. Put another way, if they did decide to go it alone and fail, Ireland would lose little or no "international credibility" if we didn't bail them out a second time. In fact, we would probably gain credibility if we did let them fail on the second go around.

Sand · 11-09-2010 05:05PM

@Johnnyskeleton

As I said, if it was a condition precedent to their leaving the guarantee that they would sink or swim on their own then there would be no problem and the State would not be obliged to bail them out a second time. Put another way, if they did decide to go it alone and fail, Ireland would lose little or no "international credibility" if we didn't bail them out a second time. In fact, we would probably gain credibility if we did let them fail on the second go around.

There was no guarantee the banks could rely on in September 2008. For all the fine words of "Never again!!!", *when* the banks get into trouble again (and they will), they will still be able to bully and intimidate the government of the day into bailing them out for fear of the prospect of a bank failure.

We need to recognise that. Our political leadership will never have the balls required to say "Sorry, not our problem". Pretending otherwise only benefits the back as they get the guarantee for free.

liammur · 11-09-2010 05:17PM

Sand wrote: »

We need to recognise that. Our political leadership will never have the balls required to say "Sorry, not our problem". Pretending otherwise only benefits the back as they get the guarantee for free.

The banks had to pay for the guarantee. IL&P which was always sound also had to pay for the guarnatee otherwise there would have been an unnecessary run on their bank.

Sand · 11-09-2010 05:41PM

They only paid for the guarantee when it suited them. They need to continue paying for the guarantee so it suits the taxpayer. Because there will be a next time.

liammur · 11-09-2010 05:44PM

Sand wrote: »

They only paid for the guarantee when it suited them. They need to continue paying for the guarantee so it suits the taxpayer. Because there will be a next time.

That's a flawed analysis.

2 wrongs don't make a right.

Sand · 11-09-2010 06:25PM

That's a flawed analysis.

2 wrongs don't make a right.

I dont follow - why is it wrong to charge for a service that we are offering the banks whether we like it or not?

We cannot go back to the pretence that banks are private institutions with no connection to the state. Its been made very clear the banks can pass their losses onto the taxpayer, so in return, the taxpayer needs to charge a premium for this forced insurance policy.

johnnyskeleton · 11-09-2010 07:04PM

Sand wrote: »

@Johnnyskeleton

There was no guarantee the banks could rely on in September 2008. For all the fine words of "Never again!!!", *when* the banks get into trouble again (and they will), they will still be able to bully and intimidate the government of the day into bailing them out for fear of the prospect of a bank failure.

We need to recognise that. Our political leadership will never have the balls required to say "Sorry, not our problem". Pretending otherwise only benefits the back as they get the guarantee for free.

Oh right. You're not talking about in the next few years but in generations to come? But surely you don't expect the guarantee to last that long anyway?

liammur · 11-09-2010 07:06PM

Sand wrote: »

I dont follow - why is it wrong to charge for a service that we are offering the banks whether we like it or not?

We cannot go back to the pretence that banks are private institutions with no connection to the state. Its been made very clear the banks can pass their losses onto the taxpayer, so in return, the taxpayer needs to charge a premium for this forced insurance policy.

It's not wrong to charge for the guarantee. But I wouldn't agree with

'They only paid for the guarantee when it suited them. They need to continue paying for the guarantee so it suits the taxpayer. Because there will be a next time. '

But when the guarantee expires that must be the end of the charge.
If there is a 'next time' it will be simply down to the ineptitude of our politicians and regulators. Strong regulation and there won't be a next time. Our politicians were clearly egging on the banks to lend more, so this has consequences.

ebbsy · 11-09-2010 07:34PM

It would'nt surprise me if they wanted a guarantee where they did'nt have to pay a charge. Lent out too much cash and now banjaxed ? Should have thought about that sooner.

liammur · 11-09-2010 07:49PM

ebbsy wrote: »

It would'nt surprise me if they wanted a guarantee where they did'nt have to pay a charge. Lent out too much cash and now banjaxed ? Should have thought about that sooner.

Well, we the tax payers were far too generous in our bailouts of the 5 institutions, but that's for a different day.
What we can't do now however,is over penalise them, because apart from IL&P they are on life support.

Sand · 11-09-2010 11:09PM

What we can't do now however,is over penalise them

You are right, we cant overpenalise them. Its not possible, given they would be dead if it hadnt been for the taxpayers being thrown under the bus. So given theyre not dead, its not possible to overpenalise them.

@Johnnyskeleton

Oh right. You're not talking about in the next few years but in generations to come? But surely you don't expect the guarantee to last that long anyway?

I am talking about making the terms of a guarantee explicit and required for any deposit bank operating in Ireland.

Where the state will agree to insure the deposits beneficially owned in Ireland.
And the banks will be charged a premium for this insurance.

And the banks will be discouraged from taking on leveraging or lending short term deposits long, because that will increase the risk to the Irish taxpayer.

I view this as a recognition of what has been the unspoken policy of the government - that no Irish bank with a significant deposit base can be allowed to fail. Hence the Irish taxpayer must bear any losses suffered by these banks to rescue them - regardless of claims that the banks were on their own.

This is not a short term, or time limited thing. It is not something optional the banks can enter when they want to share the losses, and leave when they want to keep the profits.

Its in the interests of the taxpayer, shockingly enough.

johnnyskeleton · 12-09-2010 12:18AM

Sand wrote: »

@Johnnyskeleton

I am talking about making the terms of a guarantee explicit and required for any deposit bank operating in Ireland.

Where the state will agree to insure the deposits beneficially owned in Ireland.
And the banks will be charged a premium for this insurance.

And the banks will be discouraged from taking on leveraging or lending short term deposits long, because that will increase the risk to the Irish taxpayer.

I view this as a recognition of what has been the unspoken policy of the government - that no Irish bank with a significant deposit base can be allowed to fail. Hence the Irish taxpayer must bear any losses suffered by these banks to rescue them - regardless of claims that the banks were on their own.

This is not a short term, or time limited thing. It is not something optional the banks can enter when they want to share the losses, and leave when they want to keep the profits.

They could always just increase the amount that the banks have to pay into the deposit protection scheme, which was derisory prior to the banking collapse. Much better that way than have the government expressly guarantee the banks out of their own money.

Even now, the proposed Anglo deposit bank is an example of a shockingly bad waste of taxpayer's money. They are paying the highest deposit rates in the State and if they drop them then the money will go into other bank accounts. But their high rates also put a lot of pressure on other banks to keep their rates high. This in turn makes Ireland a less attractive place for real banks to operate in. That is pure loss for the taxpayer, and ironically those funds could be put into BOI or AIB and given a lower rate which would help those banks to improve their balance sheets.

Sand wrote: »

Its in the interests of the taxpayer, shockingly enough.

I don't think it is. The best interests of the taxpayer in the medium to long term is to make sure that banks are regulated properly, perhaps so much so that no one bank can ever again be of systemic importance, and that if they are to have investment branches or dodgy loan parts to them, these would be separate companies with limited liability so that the investors would know the risks.

That, plus letting banks fail if they make mistakes is in the best interests of the taxpayer.

None of the guarantees, bailouts, nationalisations or NAMA systems have been in the best interests of the taxpayer, so the last thing we want to do is give the impression that these will be available the next time.

Of course, we are now on bailout no.3 (or is it 4) of AIB, a bank whose very origin is the bailing out of a few smaller banks. Lets end these bailouts. Lets ensure that bailing out banks is not an option for any government in the future and likewise lets ensure that no future government is ever put in a position where they feel that they need to bail out the banks.

Whatever you want to say about the wider economic implications, from the taxpayer's point of view we should never give a benefit or subsidy to a private company. EVER.

sellerbarry · 12-09-2010 07:35AM

How can public confidence be raised in our banking system ,when the same people who have them this way are still running them ?

Scarab80 · 12-09-2010 01:05PM

IMO the only way to ensure that the state is never again required to intervene in another bank bailout is to recognise the reality of the banking system. So long as you have long term loans funded by short term or indeed on demand funding the possibility of another bank run is always possible and given enough time inevitable.

Consider this proposal,

(1) Separate banks lending and retail/business services sections.

- Retail and business services will include all demand deposits as liabilities and cash as it's assets, the cash will not be invested but will be held by the banks as custodian. The banks will charge the demand depositers for the costs associated with holding this cash, i.e. security costs, insurance costs and will charge customers for services provided such as an ATM network. Money held on demand deposit will therefore have a negative rate of return.

- Banks will no longer engage in direct lending but will instead act as ratings agencies. If you want a loan you go to your local bank and go through the loan application procedures as normal however instead of being approved for a loan you are issued with a credit rating for that loan.

- Banks can also act as debt recovery agencies.

(2) Create a primary and secondary market for lending along the lines of Zopa. As a prospective borrower you take your credit rating received from the bank and place an offer on the primary market, prospective lenders looking for a return will also bid on this market. Once funds are matched a bond is issued for the term of the loan at a particular interest rate (fixed or floating). To spread the effect of possible bad debt losses, bonds could be issued in batches - for example AA Residential Mortgage bond maturing September 2030. Similarly lenders can manage the risk/return they want to receive by diversifying and buying bonds relating to specific sectors with specfic maturities and credit rating.

Now not too many people would be prepared to drop their capital on a mortgage with no access to it for 30 years, so a secondary market must be created where the bonds issued on the primary market can be bought and sold. This further allows investors to invest in whatever part of the yield curve they desire.

With money held on demand producing a negative rate of return, customers will be incentivised to keep their money in bonds, and sell bonds on the secondary markets and transfer to their demand account as it is needed.

(3) The banks would now compete on the basis of value and cost of services provided in the retail sector and on the basis of their ability to correctly price risk and provide an effective marketplace and bond products in the lending sector.

(4) Problems with this kind of system are
- How to transfer from our current system to this maturity matched system
- If too much money continues to be held on demand this can have a deflationary effect on the economy.
- Is the time and cost involved in managing money worth it or is it better to let the banks manage your money as per current system*
- Are Joe and Mary Bloggs knowledgeable or interested enough to operate such a system*

*I believe these concerns could be addressed by the emergence of companies who would manage your money on your behalf.

(5) In the event of another asset bubble with high levels of default the cost would be borne by those who took the decision to lend and the world would just keep rolling on.

Any thoughts?

Bank of Ireland trying to leave Guarantee

Comments